I get this question a lot and despite the availability of the IRS tax brackets, it’s not always clear how to figure out which tax bracket you are in. Fortunately with a little math and some approximation, it’s quite simple to figure out which tax bracket you are in. A common mistake is to just look at your salary and look at the table, that ignores your personal exemption (and any you get for dependents) plus your deductions. We can do a better job at approximating than that!

Why do you want to know? The biggest reason most people want to know is for tax planning purposes. If you’re going to be in a higher tax bracket this year, it pays to accelerate your deductions (make larger donations this year, pay your mortgage a little early to get the interest deduction, etc.) into 2011 rather than wait until 2012. If you know you’re going to be in a higher tax bracket next year, it pays to delay them (assuming the time difference is not a factor). In the end, will it matter if you are in the 28% or 25% tax bracket? Not necessarily but we want to get as accurate as possible without going too deep that we get caught up in the minor details.

So, let’s figure this out.

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As tax season continues, you are likely to find at least one tax scam. Indeed, tax scams are common this time of year, since many unscrupulous types are looking for ways to make a quick buck. Most of the tax scams that you are likely to fall victim to include those designed to get your personal financial information.

Giving out your personal financial information is something that should be done with extreme caution. Scammers play on your desire to get more money — and possibly get it fast. They try and set up situations in which it seems to make sense to provide personal financial information. Of course, once you have done that, these fraudsters can open new credit cards in your name, or even raid your bank account. Here are some common tax scams that you might see this tax season:

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No likes the idea of going through a tax audit. Indeed, many of us get downright nervous about being audited. There is no way to completely avoid an audit; some IRS audits are performed randomly. You never when your number will come up. Most audits, though, are performed because of some red flag the IRS sees when looking at your tax return.

If you want to reduce the chances that you will be audited for something that is in your tax return, you will need to be careful about you fill out the forms. For the most part, avoiding IRS red flags is fairly simple: Only take the deductions and credits you are actually entitled to, and double check your return for mistakes.

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If you’re a personal finance stats junkie like me, you’d love the IRS Data Book. It is chock full of fun and interesting statistics that give you a glimpse of one of the more private havens in one’s life – their tax return. While you can’t sneak a peek at your neighbor’s return, you can guess some interesting facts about American society through our tax returns.

I take a romp through the IRS Data Book and pull out a few fun statistics that I found interesting, or surprising, and I hope you enjoy them too. All of the data is taken from the Excel spreadsheets for Fiscal Year 2010 but they also issue a PDF that summarizes some of the higher level statistics.

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Last week, one of the biggest stories in the news was how much General Electric paid in federal taxes. The genesis of the story was a New York Times article in which the third paragraph said:

Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

GE responded, tweeting:

GE paid significant U.S. fed income tax in 2010, along w/ $1B+ in payroll, state & local

Henry Blodget dug a little deeper (so did many others, such as Megan McArdle, Business and Economics Editor for The Atlantic). As always, the truth is somewhere in the middle.

Let’s be honest, GE is like any other person – they want to minimize their taxes. It’s like complaining that your friend donated a junker to a charity just for the tax deduction, it’s all part of the game. If you want to complain about something, complain about how corporate taxes work. Complain to your Senator and your Representative.

Finally, GE isn’t alone in this. Almost every major corporation pays a pittance in taxes. The only ones who benefit from our convoluted tax structure are the accountants.

How do you feel about GE and how little they paid in taxes?

Doing your taxes is never fun. Even if you ignore how you must spend a couple hours filling out boring forms, finding documents, researching deductions, blah blah, there’s always the fear that you’ll be audited. I remember having the most vanilla tax returns back when I was a teenager, the 1040-EZ, and even then I was irrationally concerned about an audit.

The reality is that very few people get audited, just a percent or so each year (in 2010, 1.1% of returns were examined), and some of them deserve it. As much as we may like to think of the IRS as some cruel, emotionless monster trying to make the lives of hardworking Americans as miserable as possible, it’s not. They’re trying to collect tax revenue so the government can continue to provide the services hardworking Americans need.

How do they decide who to audit? It’s actually very straightforward.

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If you’ve started doing some work on the side, chances are you’ll have run into the Form W-9. As is the case with any form that has the letter W, this one has to do with wages. The Form W-9 is like the Form I-9 except it’s for independent contractors, not employees. This distinction is important for the employer because the rules are different for contractors.

The Form W-9 is a single page form that’s very straightforward. Your employer will use this information for the purposes of taxes (calculating withholding, filling out your 1099-MISC, etc.) and other HR related issues. This form doesn’t get sent to the IRS, which is noted in the upper right corner.

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I don’t usually dispense much information about filling out IRS forms manually because I am a big believer in e-filing. There are, however, certain times when it’s necessary to mail in a form and where the benefits of e-filing are reduced significantly. For example, if you owe taxes, you can buy yourself a few extra days by mailing in the form which can mean the difference between bouncing a check and keeping the IRS happy.

That said, it’s not always easy to find where you need to mail something because the addresses change. On most forms, there will be a section that indicates where you should be mailing it. In the event you can’t find the instructions or you picked up just a form, here is a helpful list of addresses, organized by your state. Where you mail your tax return depends on where you live and whether you have included a payment and I recommend do a “Find” on this page (Ctrl-F) for your state, as this won’t be in alphabetical order because multiple states mail their forms to the same address.

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Representative Jan Schakowsky (D-Illinois) introduced new legislation, the H.R. 1124 Fairness in Taxation Act, on Wednesday, March 16th, that would introduce new tax brackets for those who earned more than $1 million dollars a year. The current top income tax rate is 35% on income starting at $373,650 and the new legislation would introduce five new brackets, starting at $1 million dollars.

The new brackets would be:

• $1 – 10 million: 45%
• $10 – 20 million: 46%
• $20 – 100 million: 47%
• $100 million – 1 billion: 45%
• $1 billion+: 45%

I don’t know what’s more stunning: the reality that there are people who make over a $1 billion a year or that there are people who make over a billion a year and pay the same tax rates as someone making a fraction of that.

In addition to adding new brackets, the bill would also tax capital gains and dividend income as ordinary income for those whose income was over $1 million. According to the Citizens for Tax Justice, these new rates and changes would raise $78 billion, though it’s unclear how that number was calculated.

As for historical precedence, the last time the top rate was over 40% was back in 1986 when the top rate was 50%. Just a few years earlier, in 1981, the top rate was 70% for incomes over $215,400 ($524,421.99 in 2011 dollars). Before you think those rates were high, the top rates have always been very high, peaking into the ninety-percents through World War 2 until the early 60′s. The Tax Foundation has a list of historical tax rates since 1913.

What do you think of these new rates? Would youl ike to see them implemented?

Remember when Warren Buffett famously declared that he paid a lower tax rate than his administrative assistant? It probably confused a lot of people who aren’t familiar with the myriad of ways our income is taxed and that confusion can lead to misplaced frustration and anger. With how charged politics can be, it’s not uncommon for people to get really passionate and fired up over things that they’ve misunderstood.

A prime example, outside of money and politics, is the issue of vaccines and autism. The link between the two was based heavily on the fraudulent work of Dr. Andrew Wakefield in what has now been declared an “elaborate fraud.” Yet autism is a very real problem, one whose cause is still unknown, and people still insist on not vaccinating their children. While I think I have a right to tell people what to do, the fact that this vehement rejection of vaccines is based mostly on a fraud is just one example of this.

So today, I hope to explain how our income is taxed and hopefully that will remove some of the existing, incorrect, ideas some people have about our tax structure.

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